Regulations for the Kentucky Gift Tax

Family Gifts

Chapter 140 of Kentucky Revised Statutes, also known as Kentucky's inheritance laws, governs gift-giving through wills and the settlement of estates. A hierarchical tax structure subjects individuals not closely related to a decedent with the heaviest tax burden on gifts. For example, spouses, parents, children, grandchildren and siblings of a decedent may receive gifts with no tax liability. Next in the structure are blood relatives not considered as close, such as nieces and nephews, aunts and uncles. This group, known as Class B beneficiaries, must pay a gift tax based on the size of the bequest.

Recently Acquired Property

KRS 140.095 exempts a percentage of the inheritance tax on property that has been taxed under Kentucky's inheritance laws during the prior five years. For example: Jane Q Public inherits property from her uncle and pays the appropriate state inheritance tax. She holds the property for three years, dies and leaves the property to her heirs. Kentucky's inheritance tax is then computed based on the present value of the property, taking into consideration the previous taxes paid.

Types of Gifts

Examples of taxable gifts include cash and liquid asset accounts, such as certificates of deposit and savings bonds. (Kentucky law provides for a tax on bank accounts regardless of the location of the financial institution holding the account.) Other gifts subject to taxation include real estate in any form, automobiles, boats, recreational vehicles, farm machinery, tools, livestock, household items, antiques and jewelry. Anything with tangible value gifted to a Kentucky resident may be subject to taxation.

Consideration

Kentucky law also stipulates that any gift received three years prior to the death of the giver will be subject to taxation if the gift was given in "contemplation of death." In other words, Jane Q Public, facing imminent death, may consequently choose to distribute gifts to her designated heirs to avoid the property going through probate (the process of settling an estate). In this case, the gifts may be taxed. Conversely, Kentucky laws state that a gift given during the three-year period for a "living reason" may be excluded. The regulations do not, however, specify what living reasons encompass and are determined on a case-by-case basis.